Debtor beats Brunner Test to Discharge Student Loans

… Notwithstanding lack of Evidence that she attempted to Negotiate Repayment Plan or Forbearance

Bankr WD Wash:

At first blush, it would appear that several of these factors weigh against Ms. Williams on the issue of good faith. There is no evidence that she attempted to negotiate a repayment plan or that she sought a deferment or forbearance. She also never made any voluntary payments on the loans in the years before she filed bankruptcy. Nonetheless, the totality of the circumstances leads to the conclusion that Ms. Williams made a good faith effort to deal with her student loans.

First, the evidence shows that her medical conditions limit her employment opportunities, that she has obtained employment within those limitations, and that she maximized her income and minimized her expenses. While the parties did not provide evidence of Ms. Williams’ expenses when she was living in Colorado and Texas, it is unrefuted that she earned no more than $14 per hour, which amounts to a gross annual salary of only $28,000. She further testified that she never made enough money to make payments on these loans; that testimony was unrefuted and is credible given her stated income since 2009.

Second, while there is no evidence that she attempted to negotiate or seek a deferment of the Trust Entities loans, she did enter into income-based repayment arrangements on her federal education loans to keep those loans in good standing. This fact shows that she was willing to enter into a repayment program if one was available for these loans.

Third, she did not file bankruptcy immediately after the educational loans became due or otherwise attempt to discharge the loans even after the Trust Entities obtained judgments against her. Unlike the debtor in Brunner, who sought to discharge her student loans within a month of the date the first payment became due, Ms. Williams waited for years before seeking bankruptcy protection.

Fourth, her inability to earn enough money to repay the loans was due to health problems and a challenging job market, factors that are beyond her control. It bears repeating that Ninth Circuit authority makes clear that failure to make any payments and failure to attempt to negotiate repayment are not dispositive of the good faith issue. See, e.g., Roth, 490 B.R at 918 (holding that lack of even minimal voluntary payments is not lack of good faith if the debtor did not have the financial wherewithal to make them). Like the debtor in Roth, the record shows that due to Ms. Williams’ limited income since 2009, any loan payment by her would have been extremely modest.

CONCLUSION

For the reasons set forth above, the Court concludes that the student loans owed by Plaintiff Jocelyn Williams to National Collegiate Student Loan Trust 2004-1, National Collegiate Student Loan Trust 2006-1, National Collegiate Student Loan Trust 2007-2, and National Collegiate Student Loan Trust 2005-1 that are identified in the Complaint would impose an undue hardship on Ms. Williams within the meaning of 11 U.S.C. 523(a)(8), and accordingly, should be discharged in their entirety. The Court will enter a separate judgment, pursuant to Federal Rule of Bankruptcy Procedure 7058 and Federal Rule of Civil Procedure 58, consistent with this Memorandum Decision.

A filed tax return or not a filed tax return – that is the question…

Posted by michael64curry

As a bankruptcy attorney in Mount Vernon, IL for over 25 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.

Here is a case involving the dischargeability of tax cases … not as much of a windmill tilt as student loans, but close …

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Read a summary of the case here.

In Re: Martin Smith, Appeal to the 9^th District from the Northern District of California, Case # 14-15857

OPINION

CHRISTEN, Circuit Judge:

Martin Smith did not file a 2001 tax form on time.

Instead, he filed a Form 1040 seven years after it was due, and three years after the IRS assessed a deficiency against him. Smith later filed for bankruptcy and sought to discharge his 2001 tax liability. The bankruptcy court permitted the discharge, but the district court reversed. Smith appeals the district court’s ruling.

FACTUAL AND PROCEDURAL BACKGROUND

After Martin Smith failed to timely file his 2001 tax forms, the IRS prepared a Substitute for Return or “SFR” based on information it gathered from third parties. In March 2006, the IRS mailed Smith a notice of deficiency. Smith did not challenge the notice of deficiency within the allotted 90 days and the IRS assessed a deficiency against him of $70,662. Three years later, in May 2009, Smith filed a Form 1040 for the year 2001 on which he wrote “original return to replace SFR.” On this late-filed form, Smith reported a higher income than the one the IRS calculated in its assessment, thereby increasing his tax liability. The IRS added the additional arrearage to its assessment. Two months after that, in July 2009, Smith submitted an offer in compromise, hoping to resolve his tax liability. The IRS rejected his offer. Smith later lost his job and the IRS allowed him to pay his tax bill in monthly installments of $150.

After about five months, Smith declared bankruptcy and sought to discharge his 2001 tax debt before the bankruptcy court. Smith and the IRS agreed that the increase in the assessment based on Smith’s late-filed form was dischargeable, but they disputed whether the IRS’s original $70,662 assessment was also dischargeable. The bankruptcy court ruled that it was. The district court reversed. Smith appeals the district court’s ruling. We have jurisdiction under 28 U.S.C. § 158(d), and we affirm the district court’s order entering summary judgment in favor of the IRS.

DISCUSSION

The bankruptcy code exempts from discharge “any . . . debt for a tax . . . with respect to which a return, or equivalent report or notice, if required . . . was not filed or given.” 11 U.S.C. § 523(a)(1)(B)(i). In In re Hatton, we adopted the Tax Court’s widely-accepted definition of “return.” 220 F.3d at 1060 (internal citation omitted). There, we stated that “[i]n order for a document to qualify as a [tax] return: (1) it must purport to be a return; (2) it must be executed under penalty of perjury; (3) it must contain sufficient data to allow calculation of tax; and (4) it must represent an honest and reasonable attempt to satisfy the requirements of the tax law.” Id. at 1060–61 (internal citation and quotation marks omitted).

When we decided Hatton, the bankruptcy code did not define “return,” id. at 1060, but Congress amended the bankruptcy code in 2005 and it added a definition. In pertinent part, the amendment reads: For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcylaw (including applicable filing requirements). 11 U.S.C. § 523(a).

We have not interpreted this new definition, but both parties and several of our sister circuits agree that Hatton’s four-factor test still applies, see In re Ciotti, 638 F.3d 276, 280 (4th Cir. 2011); In re Justice, 817 F.3d 738, 740–41 (11^th Cir. 2016); and the Tax Court has not wavered in its application of this common-law test in the sixteen years since we decided Hatton. See, e.g., Estate of Sanders v. Comm’r of Internal Revenue, 144 T.C. 63 (2015).

The parties’ dispute centers on whether Smith’s filing met the fourth requirement of the operative test: was his filing “an honest and reasonable attempt to satisfy the requirements of the tax law?” Hatton considered this question under similar circumstances. The taxpayer in Hatton failed to file a tax return and the IRS computed and assessed his tax liability by creating an SFR. Hatton, 220 F.3d at 1059. Throughout the process, the IRS sent numerous notices to Hatton, but it received no responses. Id. Hatton finally met with the IRS more than seven years after the original return was due and more than four years after the IRS assessed a deficiency. Id.

He did not dispute his liability and the IRS agreed to a $200-a-month payment plan. Id. We held that Hatton’s “belated acceptance of responsibility” was not an honest and reasonable attempt to comply with the tax code. Id. at 1061.

Here, Smith failed to make a tax filing until seven years after his return was due and three years after the IRS went to the trouble of calculating a deficiency and issuing an assessment. Under these circumstances, Smith’s “belated acceptance of responsibility” was not a reasonable attempt to comply with the tax code. Many of our sister circuits have held that post-assessment tax filings are not “honest and reasonable” attempts to comply and are therefore not “returns” at all. See In re Justice, 817 F.3d at 746; In re Payne, 431 F.3d 1055, 1057–60 (7th Cir. 2005); In re Moroney, 352 F.3d 902, 907 (4th Cir. 2003); In re Hindenlang, 164 F.3d 1029, 1034–35 (6th Cir. 1999). But see In re Colsen, 446 F.3d 836, 840–41 (8th Cir. 2006). We need not decide the close question of whether any post-assessment filing could be “honest and reasonable” because these are not close facts; the IRS communicated with Smith for years before assessing a deficiency, and Smith waited several more years before responding to the IRS or reporting his 2001 financial information.

Smith argues that Hatton’s “honest and reasonable” inquiry requires looking only at the face of the filing, and that Hatton’s facts are distinguishable because Hatton did not file a tax form at all. We disagree. Hatton focused the “honest and reasonable” inquiry on the honesty and reasonableness of the taxpayer’s conduct, not on any deficiency in the documents’ form or content. See Hatton, 220 F.3d at 1061 (“Hatton made every attempt to avoid paying his taxes until the IRS left him with no other choice.”). We hold that Hatton applies to the bankruptcy code as amended, and that Smith’s tax filing, made seven years late and three years after the IRS assessed a deficiency against him, was not an “honest and reasonable” attempt to comply with the tax code (The IRS argues that even if Smith’s filing was a return, the deficiency it assessed against Smith was not a “debt for a tax . . . with respect to which” a return was filed because Smith had not yet filed anything when it assessed the deficiency. We do not reach this argument because we hold that Smith’s filing was not a return).

AFFIRMED.

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Bankruptcy attorneys walk a tightrope when it comes to tax issues. For the most part, bankruptcy attorneys are not tax attorneys and are not accountants. If a client comes in with a tax issue, the attorney should have a tax attorney on his or her rolodex and refer the potential client to take care of the tax issue before considering filing a bankruptcy. Perhaps if the Debtor filed the returns and worked with the IRS over several months (or a year or more), the court would consider his actions a more honest and reasonable attempt to comply with the tax code.

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About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Centralia, McLeansboro or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also access my website at http://www.mtvernonbankruptcylawyer.com

False Statements and Dischargeability – a case from Southern Illinois

Posted by michael64curry

Prior blogs have discussed the Appling case – where an oral (non-written) lie about promising to pay fees with your tax refund constitutes enough of a fraud to make the debt incurred by the promise non-dischargeable. One of the cases cited in the opinion included one from my district: In re: Rhodes. I found the 1988 opinion and am reprinting it here:

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IN RE RHODES, Bankruptcy No. BK 88-40590, Adv. No. 88-0226, Southern District of Illinois; In re John A. RHODES and Karol J. Rhodes, Debtor(s). CHRYSLER FIRST FINANCIAL SERVICES CORPORATION, Plaintiff, v. John A. RHODES and Karol J. Rhodes, Defendant(s). December 1, 1988.

KENNETH J. MEYERS, Bankruptcy Judge.

This matter is before the Court on the motion of John A. Rhodes and Karol J. Rhodes (hereinafter, defendants or debtors), for judgment on the pleadings pursuant to Rule 12(c) of the Federal Rules of Civil Procedure. Rule 12(b)-(h) of the Federal Rules of Civil Procedure applies in adversary proceedings pursuant to Bankruptcy Rule 7012(b).

The complaint to which defendants direct their motion alleges that debtors are barred by §523(a)(2)(A) of the Bankruptcy Code (although plaintiff’s complaint is brought under 11 U.S.C. § 523, plaintiff argued in open court that the complaint is based on 11 U.S.C. § 523(a)(2)(A)), from discharging a debt owed to plaintiff. According to the complaint, the debtors obtained the sum of $4,113.91 by false pretenses, false representations and actual fraud when they made an oral application for an extension of their loan with plaintiff and failed to inform plaintiff of approximately $71,000.00 in debts owed to various creditors. Debtors argue that plaintiff is precluded from a determination of nondischargeability under either § 523(a)(2)(A) or §523(a)(2)(B), respectively, because the alleged false statements concern the debtors’ financial condition and because they are oral rather than written. Debtors further argue that they are entitled to judgment in their favor for costs and a reasonable attorney’s fee for this proceeding under § 523(d).

For purposes of a motion for judgment on the pleadings under Rule 12(c), the movant must “clearly establish[ ] that no material issue of fact remains to be resolved and that he is entitled to judgment as a matter of law.” 5 C. Wright & A. Miller, Federal Practice and Procedure: Civil § 1368, at 690 (1969) (footnote omitted). In considering the motion, “the trial court is required to view the facts presented in the pleadings and the inferences to be drawn therefrom in the light most favorable to the nonmoving party. . . . [A]ll of the well pleaded factual allegations in the adversary’s pleadings are assumed to be true and all contravening assertions in the movant’s pleadings are taken to be false.” Id. at 690-91 (footnote omitted).

In the instant case, even with debtors conceding the accuracy of all factual allegations in the complaint, plaintiff is precluded as a matter of law from prevailing on its claim for relief. Plaintiff argues that it is proceeding under § 523(a)(2)(A) rather than § 523(a)(2)(B). According to plaintiff, § 523(a)(2)(A) does not foreclose actions to deny discharge for debts arising from false pretenses, misrepresentations or actual fraud relating to a debtor’s financial condition. However, this argument is squarely at odds with the plain language of the statute and with caselaw interpreting this section.

Section 523(a)(2) of the Bankruptcy Code, 11 U.S.C. § 523(a)(2), provides in pertinent part:

(a) A discharge under section 727 . . . does not discharge an individual debtor from any debt —

* * * * * *

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by —

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;

(B) use of a statement in writing —

(i) that is materially false;

(ii) respecting the debtor’s or an insider’s financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive. . . .

Section 523(a)(2)(A) states unequivocally that it does not apply to statements regarding a debtor’s financial condition. False statements about a debtor’s financial condition are dealt with separately in § 523(a)(2)(B). There, such statements are subject to the requirements set forth in that section — one of which mandates that the statement be in writing in order to be actionable. Accordingly, it is clear that “[p]aragraphs (A) and (B) of section 523(a)(2) are mutually exclusive.” 3 Collier on Bankruptcy ¶ 523.08, at 523-40 to 523-41 (15th ed. 1988) (footnote omitted).

Plaintiff has not argued, and cannot credibly argue, that the oral statements or nondisclosures attributed to debtors falsely depicting the number of their creditors and the amounts of their debts are not “statement[s] respecting the debtor[s’] . . . financial condition.” 11 U.S.C. § 523(a)(2)(A). Moreover, plaintiff has provided no authority to support its position that oral statements concerning a debtor’s financial condition are not excepted from § 523(a)(2)(A). Presumably, plaintiff would have the Court negate the meaning of §§ 523(a)(2)(A) and (B) by finding oral financial statements to be actionable under paragraph (A) when financial statements — whether oral or written — are expressly governed by paragraph (B).

The courts considering this question have held that all statements concerning a debtor’s financial condition — not merely formal financial statements — are excepted from § 523(a)(2)(A) and fall within the province of § 523(a)(2)(B) where, unless they are in written form, they will not bar discharge of the debt. E.g., Blackwell v. Dabney, 702 F.2d 490, 491-92 (4th Cir.1983); Engler v. Van Steinburg, 744 F.2d 1060, 1060-61 (4th Cir.1984). See also In re Blackburn, 68 B.R. 870, 877 (Bankr.N.D.Ind.1987); In re Howard, 73 B.R. 694, 702 (Bankr.N.D. Ind.1987). Accordingly, since debtors’ statements to plaintiff were oral and concerned debtors’ financial condition, they are not encompassed by § 523(a)(2) and may not be relied upon by plaintiff to prevent discharge of the debt at issue. See, e.g., In re Snyder, 75 B.R. 130, 134 (Bankr.S.D. Ohio 1987).

Because the Court holds that plaintiff cannot prevail as a matter of law under 11 U.S.C. § 523(a)(2), it must now look to 11 U.S.C. § 523(d) to determine if debtors are entitled to recover their costs and attorney’s fee from plaintiff as requested in their Answer and in their Motion for Judgment on the Pleadings. Notably, plaintiff has failed to raise any argument against such an award.

Section 523(d) provides: If a creditor requests a determination of dischargeability of a consumer debt under subsection (a)(2) of this section, and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney’s fee for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances would make the award unjust.

This section is clear in both its language and its intent. “The awarding of attorney’s fees against an unsuccessful creditor is mandatory . . . absent a compelling showing otherwise.” Matter of Poskanzer, 55 B.R. 329, 331 (Bankr.D.N.J.1985). And, the purpose of § 523(d) is to “discourag[e] creditors from objecting to the dischargeability of consumer debts in marginal cases, or where substantial justification does not exist. . . . [T]he threat of litigation and the expenses thereof are often enough to coerce a debtor to settle or make payment in a reduced amount where otherwise the debt would . . . simply be discharged. . . . [D]ebtors are frequently unable to afford counsel to defend such cases, and, therefore, it is important that debtors’ counsel receive some monetary incentive to do so.” In re Woods, 69 B.R. 999, 1000 (Bankr.E.D.Pa.1987) (citing 3 Collier on Bankruptcy ¶ 523-12, at 523-69 to 523-70 (15th ed. 1986)). Additionally, the burden of proving substantial justification for proceeding with the lawsuit is on the plaintiff. E.g., In re Woods, 69 B.R. at 1001. In the event that plaintiff is unable to make such a showing, the sole issue is whether special circumstances exist to make an award of costs and fees unjust. E.g., Matter of Beam, 73 B.R. 434, 439 (Bankr.S.D.Ohio 1987).

In the instant case, it is clear that neither the legal arguments advanced by plaintiff nor the factual situation presented in plaintiffs’ complaint, provide substantial justification for plaintiff’s pursuit of this matter. Section 523(d) “contemplates that no pleading will be filed that does not find support in existing law or, if there is no support in existing law, that the filing will be accompanied by a good faith presentation of arguments for the extension, modification or reversal of existing law.” Matter of Beam, 73 B.R. at 438. See also In re Woods, 69 B.R. at 1001. Here, plaintiff has provided no authority in support of its position that oral statements concerning a debtor’s financial condition bar discharge under § 523(a)(2) in the face of well established authority to the contrary. In the absence of a novel legal theory advanced by plaintiff or proof of unclean hands on the part of the debtors, see, e.g., In re Woods, 69 B.R. at 1004, the Court finds no special circumstances to warrant denying debtors their costs and attorney’s fees.

IT IS ORDERED that the motion of defendants for judgment on the pleadings is GRANTED.

IT IS FURTHER ORDERED that defendants will be awarded their reasonable attorney fees and costs of this action. Counsel for defendants shall submit an application for fees and costs within ten (10) days of the date of entry of this order. The application will be subject to review by the Court.

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About the blogger:

Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, McLeansboro, Centralia or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also find his website at http://www.mtvernonbankruptcylawyer.com.

False statements and dischargeability (3)

Posted by michael64curry

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Read a synopsis of the opinion here.

Read the majority of the opinion here.

The majority of the court found that a statement “respecting the debtor’s . . . financial condition,” not just covers statements that encompass the entirety of a debtor’s financial condition at once but can also cover a single asset. This moves the dischargeability action from fraud (a)(2)(A) to the stricter criteria of (a)(2)(B) as to the statements dischargability.

Judge Rosenbaum agreed, but only in Blackstone’s “”It is better that ten guilty persons escape than that one innocent suffer” sense…

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ROSENBAUM, Circuit Judge, concurring:

Sometimes things are not as they seem. Today we conclude that the phrase “statement respecting . . . the debtor’s financial condition” in 11 U.S.C. § 523(a)(2) warrants a broad reading. As a result, Appling, the debtor in this case, will receive a discharge of the debt he incurred by lying about how he would pay for the legal services he dishonestly obtained. That certainly seems to frustrate a “primary purpose” of the Bankruptcy Act to provide relief to only the “honest debtor.” See Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934) (citation and internal quotation marks omitted).

But in actuality, the broad reading we give to the phrase “statement respecting . . . the debtor’s financial condition” better promotes congressional intent to give a fresh start to only the “honest debtor” than does a narrow construction of the same phrase. This is so because the very same phrase appears in both §§ 523(a)(2)(A) and (B), and it must have the same meaning in both subsections. Though a narrow construction of the phrase in subsection (A) seems to further congressional intent to protect only the “honest debtor,” a broad interpretation of the phrase in subsection (B) better comports with congressional intent. And the reality is that a broad construction of the phrase “statement respecting . . . the debtor’s financial condition” in subsection (B) advances congressional intent to provide relief for only the “honest debtor” more than a narrow interpretation of the same phrase in subsection (A).

Because the words of the phrase alone are ambiguous, we must construe the phrase with an eye towards congressional intent in enacting the Bankruptcy Act. When we do that, it is clear that “statement respecting . . . the debtor’s financial condition” must have the broad meaning that the panel attributes to it.

There’s no getting around it. Standing alone, the words of the phrase “statement respecting . . . the debtor’s financial condition” are not unambiguous. True, the panel seems to think they are and argues that the words clearly mean any statement about any finance, asset, or liability that the debtor may have. But other courts have concluded that the language “statement respecting . . . the debtor’s financial condition” refers to only statements about a debtor’s overall financial circumstances—which do not include statements about only a single asset or liability.

Among the courts that appear to have understood the phrase to mean the opposite of what we conclude today is the Supreme Court, though the Supreme Court has not expressly addressed the meaning of the language. In Field v. Mans, 516 U.S. 59 (1995), the Court held that a creditor need show only justifiable reliance on a fraudulent misrepresentation in order to except the debt incurred as a result of that reliance, from discharge under § 523(a)(2)(A). In reaching this conclusion, the Supreme Court discussed § 523(a)(2)(A) and (B)’s references to “a statement respecting the debtor’s . . . financial condition” and conveyed its understanding that the words “financial condition” in § 523(a)(2) are a prohibition on excepting from discharge under both subsections (A) and (B) “debts traceable to . . . a materially false financial statement,” id. at 64 (emphasis added), apparently meaning “financial statement” as a term of art referring to a statement of net worth, not a statement about a single asset or liability. So at least at the time it decided Field, the Supreme Court appeared to have a different understanding of the phrase “a statement respecting the debtor’s . . . financial condition” than we embrace today.

To be sure, I do not suggest that Field’s discussion of the meaning of “a statement respecting the debtor’s . . . financial condition” purports to instruct courts on the proper meaning of § 523(a)(2)(A). But the Supreme Court’s understanding as conveyed in Field demonstrates that the language of the phrase is fairly susceptible of more than one meaning.

Three other circuits have likewise concluded that the phrase “a statement respecting the debtor’s . . . financial condition” must be construed narrowly, to refer to only those statements about a debtor’s overall net worth—though they do not appear to have determined the language of the phrase to have an unambiguous meaning. See, e.g., In re Bandi, 683 F.3d 671 (5th Cir. 2012); In re Lauer, 371 F.3d 406 (8th Cir. 2004); In re Joelson, 427 F.3d 700 (10th Cir. 2005).

But while the language itself of the phrase in question may not be unambiguous, that doesn’t mean that § 523(a)(2) is ambiguous in the overall statutory scheme. When we construe a statute, we must do so not only by looking to the language itself, but also by reference to “the specific context in which that language is used, and the broader context of the statute as a whole.” Yates v. United States, 125 S. Ct. 1074, 1081-82 (2015) (citation and quotation marks omitted). And when we do that, it is clear that we must give the phrase “a statement respecting the debtor’s . . . financial condition” a broad construction.

The Supreme Court has repeatedly emphasized that the Bankruptcy Code “limits the opportunity for a completely unencumbered new beginning to the ‘honest but unfortunate debtor.’” Grogan v. Garner, 498 U.S. 279, 287 (1991) (quoting Hunt, 292 U.S. at 244). For this reason, only honest debtors receive the benefit of the general policy that exceptions to discharge are to be construed strictly against the creditor and liberally in favor of the debtor. In re St. Laurent, 991 F.2d 672, 680 (11th Cir. 1991). Indeed, we have said that “the malefic debtor may not hoist the Bankruptcy Code as protection from the full consequences of fraudulent conduct.” Id. at 680-81.

So to the extent that the language “statement respecting . . . the debtor’s financial condition” is fairly and reasonably susceptible of a construction that better furthers congressional intent to protect only the honest debtor, we are obliged to apply that interpretation. When it comes to § 523(a)(2), a broad construction is reasonable and better accomplishes this purpose than a narrow one.

As the panel notes, the phrase “statement respecting . . . the debtor’s financial condition” appears in both subsections (A) and (B). We therefore presume it to have the same meaning in both subsections. See Mohasco Corp. v. Silver, 447 U.S. 807, 826 (1980) (“[W]e cannot accept respondent’s position without unreasonably giving the word ‘filed’ two different meanings in the same section of the statute.”).

But though the words have the same meaning in both subsections (A) and (B), they have opposite effects on whether a debtor may discharge a debt for something obtained through the use of a “statement respecting . . . the debtor’s financial condition.” Under subsection (A), which refers to oral statements, if a statement falls within the meaning of “statement respecting . . . the debtor’s financial condition,” the debt incurred as a result of that statement is dischargeable. Meanwhile, under subsection (B), which refers to written statements, if a statement comes within the meaning of “statement respecting . . . the debtor’s financial condition,” the debt incurred as a result of that statement is not dischargeable, provided that the other conditions in subsection (B) are satisfied.

So if the phrase has a broad meaning, more false oral statements will have the effect of exempting a debt incurred as the result of a misrepresentation, from the exception to discharge (meaning that such debts will be discharged), than if we construe the phrase narrowly. But fewer false written statements will result in excusing a debt for a fraudulently obtained asset, service, or loan. And since it seems likely that, at least in arm’s length transactions, most significant debts are obtained as the result of written representations about finances, as opposed to oral ones, a broader interpretation of the phrase is less likely to benefit dishonest debtors than a narrow construction of it.

II.

For these reasons, I agree with the panel that we must construe the phrase “statement respecting . . . the debtor’s financial condition” broadly. To be sure, doing so has the effect of allowing Appling’s debt for legal services, which the bankruptcy court concluded he obtained by lying to Lamar about the tax refund, to be discharged. But in the overall statutory scheme, the broad interpretation better promotes Congress’s concern to provide relief to “honest debtors” only.

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About the blogger:

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, McLeansboro, Centralia or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also find his website at http://www.mtvernonbankruptcylawyer.com.

False statements and dischargeability (2)

Posted by michael64curry

Read a brief synopsis of the opinion here.

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In re: R. SCOTT APPLING, Debtor versus LAMAR, ARCHER & COFRIN, LLP. An Appeal from the United States District Court for the Middle District of Georgia; Case # 16-11911 Date Filed: 02/15/2017

Before WILLIAM PRYOR and ROSENBAUM, Circuit Judges, and MARTINEZ,* District Judge.

WILLIAM PRYOR, Circuit Judge:

This appeal presents a question that has divided the federal courts: Can a statement about a single asset be a “statement respecting the debtor’s . . . financial condition”? 11 U.S.C. § 523(a)(2). Ordinarily, a debtor cannot discharge any debt incurred by fraud, id. § 523(a)(2)(A), but a debtor can discharge a debt incurred by a false statement respecting his financial condition unless that statement is in writing, id. § 523(a)(2)(B). R. Scott Appling made false oral statements to his lawyers, Lamar, Archer & Cofrin, LLP, that he expected a large tax refund that he would use to pay his debt to the firm. After Lamar obtained a judgment against Appling for the debt, Appling filed for bankruptcy and Lamar initiated an adversary proceeding to have the debt ruled nondischargeable. The bankruptcy court and the district court ruled that Appling’s debt could not be discharged under section 523(a)(2)(A) because it was incurred by fraud. But we disagree. Because Appling’s statements about his tax refund “respect[] [his] . . . financial condition,” id. § 523(a)(2)(B)(ii), and were not in writing, id. § 523(a)(2)(B), his debt to Lamar can be discharged in bankruptcy. We reverse and remand.

BACKGROUND
Scott Appling hired the law firm Lamar, Archer & Cofrin, LLP, to represent him in litigation against the former owners of his new business. Appling agreed to pay Lamar on an hourly basis with invoices for fees and costs due monthly. Appling became unable to keep current on the mounting legal bill and as of March 2005, owed Lamar $60,819.97. Lamar threatened to terminate the firm’s representation and place an attorney’s lien on all work product unless Appling paid the outstanding fees.

Appling and his attorneys held a meeting in March 2005. The bankruptcy court found that during this meeting Appling stated he was expecting a tax refund of “approximately $100,000,” which would be enough to pay current and future fees. Lamar contends that in reliance on this statement, it continued its representation and did not begin collection of its overdue fees.

When Appling and his wife submitted their tax return, they requested a refund of only $60,718 and received a refund of $59,851 in October. The Applings spent this money on their business. They did not pay Lamar.

Appling and his attorneys met again in November 2005. The bankruptcy court found that Appling stated he had not yet received the refund. Lamar contends that in reliance on this statement, it agreed to complete the pending litigation and forego immediate collection of its fees but refused to undertake any additional representation. In March 2006, Lamar sent Appling his final invoice for a principal amount due of $55,303.66 and $6,185.32 in interest.

Five years later, Lamar filed suit against Appling in a superior court in Georgia. In October 2012, Lamar obtained a judgment for $104,179.60. Three months later, the Applings filed for bankruptcy.

Lamar initiated an adversary proceeding against Appling in bankruptcy court. The bankruptcy court ruled that because Appling made fraudulent statements on which Lamar justifiably relied, Appling’s debt to Lamar was nondischargeable, 11 U.S.C. § 523(a)(2)(A). The district court affirmed. The district court rejected Appling’s argument that his oral statements “respect[ed] . . . [his] financial condition,” 11 U.S.C. § 523(a)(2)(B), and should have been dischargeable. The district court ruled that “statements respecting the debtor’s financial condition involve the debtor’s net worth, overall financial health, or equation of assets and liabilities. A statement pertaining to a single asset is not a statement of financial condition.” The district court agreed with the bankruptcy court that Appling made material false statements with the intent to deceive on which Lamar justifiably relied.

STANDARD OF REVIEW

When we sit as the second appellate court to review a bankruptcy case, In re Glados, Inc., 83 F.3d 1360, 1362 (11th Cir. 1996), we “assess the bankruptcy court’s judgment anew, employing the same standard of review the district court itself used,” In re Globe Mfg. Corp., 567 F.3d 1291, 1296 (11th Cir. 2009). “Thus, we review the bankruptcy court’s factual findings for clear error, and its legal conclusions de novo.” Id.

III. DISCUSSION

The Bankruptcy Code gives a debtor a fresh start by permitting him to discharge his pre-existing debts. But there are many exceptions to discharge. And some of those exceptions protect victims of fraud.

Section 523(a)(2) creates two mutually exclusive exceptions to discharge:

(a)A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—

. . .

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;

(B) use of a statement in writing—

(i) that is materially false;

(ii) respecting the debtor’s or an insider’s financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive; . . .

The Code treats debts incurred by a statement “respecting the debtor’s . . . financial condition” differently from other debts. Id. All fraud “other than a statement respecting the debtor’s . . . financial condition” is covered by subsection (A). Id. § 523(a)(2)(A). Under subsection (A), a debtor cannot discharge a debt obtained by any type of fraudulent statement, oral or written. Id. A creditor also need prove only justifiable reliance. Field v. Mans, 516 U.S. 59, 61 (1995). But if a statement is made “respecting the debtor’s . . . financial condition,” then subsection (B) governs. 11 U.S.C. § 523(a)(2)(B)(ii). To avoid discharge of a debt induced by a statement respecting the debtor’s financial condition, a creditor must show reasonable reliance and that the statement was intentional, materially false, and in writing. Id. § 523(a)(2)(B). Thus, a debt incurred by an oral, fraudulent statement respecting the debtor’s financial condition can be discharged in bankruptcy.

We must determine whether Appling’s statements about a single asset are “statement[s] respecting [his] . . . financial condition.” Id. § 523(a)(2). The bankruptcy court found that Appling made false oral statements about his anticipated tax refund to receive an extension of credit from Lamar. If these statements do not respect his financial condition, Appling can discharge his debt to Lamar in bankruptcy only if he disproves an element of fraud. Id. § 523(a)(2)(A). But if the statements do respect his financial condition, Appling can discharge his debt to Lamar because the statements were not in writing. Id. § 523(a)(2)(B).

The circuits and other federal courts are split on this question. The Fourth Circuit has held that a “debtor’s assertion that he owns certain property free and clear of other liens is a statement respecting his financial condition.” Engler v. Van Steinburg, 744 F.2d 1060, 1061 (4th Cir. 1984). Several bankruptcy courts—including one in this Circuit, In re Aman, 492 B.R. 550, 565 & n.47 (Bankr. M.D. Fla. 2010)—have agreed. See, e.g., In re Carless, No. 10-42988, slip op. at *3–4 (Bankr. D.N.J. Jan. 6, 2012); In re Nicolai, No. 05-29876, slip op. at *1 (Bankr. D.N.J. Jan. 31, 2007); In re Hambley, 329 B.R. 382, 399 (Bankr. E.D.N.Y. 2005); In re Priestley, 201 B.R. 875, 882 (Bankr. D. Del. 1996); In re Kolbfleisch, 97 B.R. 351, 353 (Bankr. N.D. Ohio 1989); Matter of Richey, 103 B.R. 25, 29 (Bankr. D. Conn. 1989); In re Rhodes, 93 B.R. 622, 624 (Bankr. S.D. Ill. 1988); In re Howard, 73 B.R. 694, 702 (Bankr. N.D. Ind. 1987); In re Panaia, 61 B.R. 959, 960–61 (Bankr. D. Mass. 1986); In re Roeder, 61 B.R. 179, 181 n.1 (Bankr. W.D. Ky. 1986); In re Prestridge, 45 B.R. 681, 683 (Bankr. W.D. Tenn. 1985).

But the Fifth, Eighth, and Tenth Circuits have held that a statement about a single asset does not respect a debtor’s financial condition because it “says nothing about the overall financial condition of the person making the representation or the ability to repay debt.” In re Bandi, 683 F.3d 671, 676 (5th Cir. 2012); see also In re Lauer, 371 F.3d 406, 413–14 (8th Cir. 2004); In re Joelson, 427 F.3d 700, 706 (10th Cir. 2005).

And some bankruptcy courts in other circuits have agreed. See, e.g., In re Feldman, 500 B.R. 431, 437 (Bankr. E.D. Penn. 2013); In re Banayan, 468 B.R. 542, 575–76 (Bankr. N.D.N.Y. 2012); In re Campbell, 448 B.R. 876, 886 (Bankr. W.D. Penn. 2011).

“[I]nterpretation of the Bankruptcy Code starts ‘where all such inquiries must begin: with the language of the statute itself.’” Ransom v. FIA Card Servs. N.A., 562 U.S. 61, 69 (2011) (quoting United States v. Ron Pair Enters, Inc., 489 U.S. 235, 241 (1989)). Because the Code does not define the relevant terms, we look to “their ordinary, everyday meanings—unless the context indicates that they bear a technical sense.” Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 69 (2012); see also In re Piazza, 719 F.3d 1253, 1261 (11th Cir. 2013) (applying this canon to the Bankruptcy Code). The text and context establish that a statement about a single asset can be a “statement respecting the debtor’s . . . financial condition.” 11 U.S.C. § 523(a)(2).

“Financial condition” likely means one’s overall financial status. Elsewhere in the statute, the Bankruptcy Code defines “insolvent” as the “financial condition such that the sum of such entity’s debts is greater than all of such entity’s property.” Id. § 101(32)(A). In this context, the statute uses “financial condition” to describe the overall state of being insolvent, not any particular asset on its own. Because “[a] word or phrase is presumed to bear the same meaning throughout a text,” Scalia & Garner, supra, at 170, we should interpret “financial condition” in section 523(a)(2) in the same way. Whether by its ordinary meaning or as a term of art, “financial condition” likely refers to the sum of all assets and liabilities.

But even if “financial condition” means the sum of all assets and liabilities, it does not follow that the phrase “statement respecting the debtor’s . . . financial condition,” Id. § 523(a)(2) (emphasis added), covers only statements that encompass the entirety of a debtor’s financial condition at once. Read in context, the phrase “statement respecting the debtor’s . . . financial condition,” id., includes a statement about a single asset. We must not read the word “respecting” out of the statute. See Scalia & Garner, supra, at 174 (“If possible, every word . . . is to be given effect.”).

“Respecting” is defined broadly as “[w]ith regard or relation to; regarding; concerning.” Respecting, Webster’s New International Dictionary 2123 (2d ed. 1961); see also Respecting, Oxford English Dictionary (online ed.) (“With respect to; with reference to; as regards.”). For example, documents can “relate to” or “concern” someone’s health without describing their entire medical history. Articles can “reference” the Constitution without quoting its entire text. Likewise, a statement can “respect” a debtor’s “financial condition” without describing the overall financial situation of the debtor. The Supreme Court has interpreted “with respect to” in a statute to mean “direct relation to, or impact on.” Presley v. Etowah Cty. Comm’n, 502 U.S. 491, 506 (1992). And the Court has interpreted “respecting” in the First Amendment to include any partial step toward the establishment of religion. Lemon v. Kurtzman, 403 U.S. 602, 612 (1971). A statement about a single asset “relates to” or “impacts” a debtor’s overall financial condition. And knowledge of one asset or liability is a partial step toward knowing whether the debtor is solvent or insolvent.

If the statute applied only to statements that expressed a debtor’s overall financial condition, Congress could have said so. Lamar argues that “the preposition ‘respecting’ has no magic, expansive effect in the statute, it is simply a required grammatical device necessary to connect two related terms.” Perhaps this argument would have more sway if the statute said “statement of the debtor’s financial condition.” But Congress did not use this language. Congress also did not say “statement indicating” or “revealing” or “disclosing” or “encompassing” the debtor’s financial condition, phrases that would connote a full or complete expression of financial condition.

Lamar dismisses the focus on the word “respecting” as “nothing more than a game of semantics,” but judges have a responsibility to interpret the whole text. And “[s]ometimes the canon [of ordinary meaning] governs the interpretation of so simple a word as a preposition.” Scalia & Garner, supra, at 71. A statement about a single asset is still a statement respecting a debtor’s financial condition.

Lamar argues that because the legislative history often used “financial statement” in place of “statement respecting the debtor’s . . . financial condition,” 11 U.S.C. § 523(a)(2), we should read the statute to apply only to financial statements, but the word “statement” should also be given its ordinary meaning. Mere proximity of “statement” to “financial condition” is not enough to limit the meaning of the text. “Statement” is defined as “[t]hat which is stated; an embodiment in words of facts or opinions; a narrative; recital; report; account.” Statement, Webster’s New International Dictionary 2461 (2d ed. 1961). The definition of financial statement is technical and would exclude a statement about a single asset: “A balance sheet, income statement, or annual report that summarizes an individual’s or organization’s financial condition on a specified date or for a specified period by reporting assets and liabilities.” Financial Statement, Black’s Law Dictionary (10th ed. 2014). Setting aside the problems with legislative history, Lamar’s argument works against it. Precisely because “[t]he term ‘financial statement’ has a strict, established meaning,” Joelson, 427 F.3d at 709, we should expect the statute to say “financial statement” if it conveys that meaning. But the statute instead says “statement.” To limit the definition to only “financial statements,” Congress need only say so. Cf. 11 U.S.C. § 1125 (using the term “disclosure statement”); Id. § 101(49)(A)(xii) (“registration statement”).

The surplusage cannon supports our determination that “statement” should be given its ordinary meaning. “If possible, every word and every provision is to be given effect. . . . None should needlessly be given an interpretation that causes it to duplicate another provision or to have no consequence.” Scalia & Garner, supra, at 174; see also Reiter v. Sonotone Corp., 442 U.S. 330, 339 (1979). In subsection (B), the statute says “use of a statement in writing.” 11 U.S.C. § 523(a)(2)(B). Because a formal financial statement is almost always a written document (it is hard to imagine an oral recitation of all assets and liabilities), reading the statute to cover only financial statements would render the writing requirement surplusage.

And in the context of a statute about fraud, the ordinary meaning of the word “statement” makes sense. Section 523(a)(2) creates two similar exceptions to discharge for debts incurred by fraud. Subsection (A) references specific common-law torts. See Field, 516 U.S. at 69 (“‘[F]alse pretenses, a false representation, or actual fraud,’ carry the acquired meaning of terms of art. . . . [T]hey imply elements that the common law has defined them to include.” (quoting 11 U.S.C. § 523(a)(2)(A))). Subsection (B) enumerates its own elements which are analogous, but not identical to the common law elements. For example, where the common law requires justifiable reliance, section 523(a)(2)(B)(iii) requires reasonable reliance. Field, 516 U.S. at 72–75. Similarly, where the common law requires either an affirmative representation or an intentional omission, section 523(a)(2)(B) requires a “statement,” as opposed to an omission. True, if Congress wanted to exclude omissions from subsection (B), it could have used the term “representation” and avoided the confusion with the term “financial statement.” But Congress would not have said “false representation” without implying the common law term of art. See Field, 516 U.S. at 69. Accordingly, “statement” means an expression or embodiment in words, as opposed to a nonactionable omission.

Lamar also argues that the “only way to give Section 523(a)(2)(A) meaning is to interpret it to provide a distinction between oral and written representations,” but this argument reveals a fundamental misunderstanding of the statute. Section 523(a)(2)(A) covers most fraud. But section 523(a)(2)(B) covers statements respecting financial conditions. Lamar states that “certain oral misrepresentations must be non-dischargeable.” They are. Any debt incurred by an oral misrepresentation that is not “respecting the debtor’s financial condition” is nondischargeable under subsection (A). Appling provides a list of examples, including false representations about job qualifications and lies about the purpose and recipient of a payment. The question is how broadly to define the phrase “statement respecting the debtor’s . . . financial condition,” not whether allowing discharge of debts incurred by oral misrepresentations about finances is a good idea. The statute allows the discharge of debts incurred by oral statements so long as they “respect” the debtor’s “financial condition.” Lamar’s argument is based on policy, not statutory structure.

When the language of the statute is clear, we need not look any further. See Puerto Rico v. Franklin Cal. Tax-Free Tr., 136 S. Ct. 1938, 1946 (2016) (When “the statute’s language is plain,” “that is also where the inquiry should end.” (internal quotations omitted)); United States v. Great Northern Ry. Co., 287 U.S. 144, 154 (1932) (“[W]e have not traveled, in our search for the meaning of the lawmakers, beyond the borders of the statute.”). A distaste for dishonest debtors does not empower judges to disregard the text of the statute. Because the text is not ambiguous, we hold that “statement[s] respecting the debtor’s . . . financial condition” may include a statement about a single asset.

This result is also perfectly sensible. The requirement that some statements be made in writing promotes accuracy and predictability in bankruptcy disputes that often take place years after the facts arose. Lamar refers to our interpretation as a “giant fraud loophole.” But the requirement of a writing is not at all unusual in the history of the law. From the Statute of Frauds to the Uniform Commercial Code, law sometimes requires that proof be in writing as a prerequisite to a claim for relief. This requirement may seem harsh after the fact, especially in the case of fraud, but it gives creditors an incentive to create writings before the fact, which provide the court with reliable evidence upon which to make a decision. In the context of a debt incurred by fraud, a lender concerned about protecting its rights in bankruptcy can easily require a written statement from the debtor before extending credit. Lamar, a law firm, could have required Appling to put his promise to spend his tax return on their legal fees in writing before continuing to represent him.

This rule strikes a reasonable balance between the “‘conflicting interests’ of discouraging fraud and of providing the honest but unfortunate debtor a fresh start.” In re Vann, 67 F.3d 277, 284 (11th Cir. 1995) (quoting Grogan v. Garner, 498 U.S. 279, 287 (1991)). The code does not unfairly reward dishonest debtors, but instead imposes different requirements of proof for different kinds of statements. A statement respecting a debtor’s financial condition must be in writing, which helps both the honest debtor prove his honesty and the innocent creditor prove a debtor’s dishonesty. And providing an incentive for creditors to receive statements in writing may reduce the incidence of fraud. Because a statement about a single asset can be a “statement respecting the debtor’s . . . financial condition,” and because Appling’s statements were not in writing, his debt can be discharged under section 523(a)(2)(B).

CONCLUSION

We REVERSE the order ruling that Appling’s debt to Lamar is nondischargeable and REMAND for further proceedings consistent with this opinion.

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About the blogger:

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, McLeansboro, Centralia or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also find his website at http://www.mtvernonbankruptcylawyer.com.

Discharging Student Loans in bankruptcy: sometimes the good guys win!

Posted by michael64curry

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.

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Another Student Loan case. But this time logic and common sense prevailed. The Honorable Judge Christopher M. Alston used reasonableness and compassion and ruled, as will inevitably be the case in decades to come, the correct (and right – there is a difference) decision!

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The US Bankruptcy Court for the Western District of Washington (Seattle), Case # 16-01114:0

Jocelyn Williams, Plaintiff, vs. National Collegiate Student Loan Trust 2004-1; National Collegiate Student Loan Trust 2006-1; National Collegiate Student Loan Trust 2007-2; & National Collegiate Student Loan Trust 2005-1.

THIS MATTER came on regularly for trial on January 24, 2017, before the Court. The Court considered the documents admitted into evidence, the testimony of witnesses, and argument of counsel, and took the matter under advisement.

FINDINGS OF FACT

Based upon the foregoing, the Court makes the following findings of fact:

Between 2004 and 2007, Plaintiff Jocelyn Williams (“Ms. Williams”) pursued secondary education at Metropolitan State College of Denver, in Denver, Colorado and the University of Phoenix, online. During that period, she entered into five private student loans for her own education. In 2005, she also co-signed on a student loan for her sister, who attended Prairie View A&M University in Prairie View, Texas.
The lenders paid the loan proceeds either to Ms. Williams or directly to the respective school. The Defendants, hereinafter collectively referred to as the “Trust Entities,” now own all of the loans.
Between 2009 and 2011, Ms. Williams lived in Denver, Colorado and in Texas. While living in Denver, she held a full-time job that paid her $12 per hour. While living in Texas she held a full-time job that paid her $14 per hour. Ms. Williams moved to Washington in 2011. Even though she actively sought work, she had difficulty finding employment. Since 2014, she has worked in school districts in Kitsap County. Ms. Williams’ net earnings for 2016 averaged less than $1,500.00 per month. Ms. Williams works as a substitute teacher and aide for the Central Kitsap School District and Bremerton School District, earning up to $17.66 per hour, without benefits. She perhaps could earn more money if she obtained a teaching certificate, but she does not have the financial resources to pursue one without borrowing, which she is justifiably reluctant to do. In the summer of 2016, she worked at a foot and ankle clinic and earned $1,350 over the course of the entire summer. Ms. Williams receives $194.00 per month in food assistance from the State of Washington.
Ms. Williams defaulted on all six loans. There is no evidence that she ever made any payments on any of the six loans or that she attempted to negotiate a payment plan. In 2012, the Trust Entities sued Ms. Williams in Kitsap County Superior Court on each of the defaulted loans, with the exception of the co-signed loan, and the Trust Entities obtained judgments against her in March 2014. The judgments accrue interest at 12% per annum. The combined amounts of principal, fees, and accrued interest on the judgments and co-signed loan exceed $250,000.00. The annual interest that accrues exceeds $30,000.00. On at least one of the judgments, the Trust Entities issued writs of garnishment to Ms. Williams’ banks and to one her employers. The Trust Entities recovered $42 from these efforts.
Ms. Williams cannot seek or accept full-time employment due to her chronic and progressive health problems. Ms. Williams suffers from type 2 diabetes with associated diabetic neuropathy, carpal tunnel syndrome, osteoarthritis in both knees, joint pain, high blood pressure, progressive retinal neuropathy, anxiety, and depression. Many of her health problems are chronic and progressive in nature. Her medication for arthritis only slows down the progress of the disease. There are some days that her health issues restrict her ability to leave her home. Ms. Williams’ currently receives her health care at no charge through Apple Health, Washington’s Medicaid program. She is 44 years old.
In addition to the loans at issue in this proceeding, Ms. Williams had two federal student loans. Her federal student loans are in good standing under the Income-Based Repayment program. Based on her income, her loan payments under these programs are $0.00. The Trust Entities do not offer income-driven payment options.
Ms. Williams lives with several other adults in a rented house. She does not own any real estate or a vehicle. She drives a 1999 Ford Escort owned by her sister. She has no retirement savings or personal savings. The expenditures on her personal budget are minimal.
Ms. Williams does pay approximately $54 a month for training at a gym. She testified that the training constitutes physical therapy that she needs to maintain mobility in her arms and legs. Given her medical conditions, such therapy is necessary and the amount spent each month is reasonable.
Ms. Williams filed a voluntary petition under chapter 7 of the Bankruptcy Code on February 9, 2016. She has no dependents. She received a discharge on June 15, 2016.

CONCLUSIONS OF LAW

Based on the above findings of fact, the Court makes the following conclusions of law:

This Court has jurisdiction pursuant to 28 U.S.C. §1334(b). This is a core proceeding under 28 U.S.C. §157(b)(2)(I) as it involves the dischargeability of a debt in bankruptcy pursuant to 11 U.S.C. § 523(a)(8). The Court has the authority to enter final orders and judgments in this proceeding. To the extent the Court does not have authority to issue a final order absent the consent of the parties in accordance with Stern v. Marshall, 564 U.S. 462 (2011), the parties to this proceeding have provided their knowing and voluntary consent to this Court entering final orders and judgments. See Wellness International Network, Ltd. v. Sharif, 135 S.Ct. 1932 (2015).
Educational loans are not subject to discharge unless excepting such debt from discharge would impose an undue hardship on the debtor and the debtor’s dependents. 11 U.S.C. § 523(a)(8). The purpose of the loans now owned by the Trust Entities was to facilitate the education of Ms. Williams and her sister. These loans therefore fall within the meaning of section 523(a)(8).
In order to include these educational loans within her discharge, Ms. Williams must demonstrate that the loans would impose an “undue hardship,” a term that Congress did not define in the Bankruptcy Code. The Second Circuit established a three-part test for a discharge of a student loan obligation. This test requires the debtor to show (1) that she cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans, (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans, and (3) that she has made good faith efforts to repay the loans. In re Brunner, 831 F.2d 395, 396 (2d Cir. 1987). The Ninth Circuit has adopted the three-part Brunner test. United Student Aid Funds v. Pena (In re Pena), 155 F.3d 1108, 1112 (9th Cir. 1998). The debtor has the burden of proving all three elements before discharge can be granted. Id. at 1111. The standard of proof is the preponderance of the evidence standard. In re Roth, 490 B.R. 908, 916-17 (B.A.P. 9th Cir. 2013).
Ms. Williams is currently maximizing her income by working as many days as she can and by seeking the highest paying type of temporary work available in her local school districts (as a substitute teacher). Ms. Williams is limited in the ability to earn income by her health problems and by her lack of a teaching certificate that would allow her to use her classroom skills, should her health enable her to accept a teaching position and if she had the financial resources to pursue a certificate. The fact that she currently qualifies for food stamps and free health care confirms that her income is insufficient to provide for her basic needs. Her current monthly expenses total $1,700, which exceed her income by about $100. She lives with several other adults in a rented house and pays $700 per month in rent and another $50 per month for renters insurance. She spends $224 a month on car insurance and gas. The $54 per month expense on training at a gym is reasonable and necessary for Ms. Williams’ physical and mental health. These and her other monthly expenditures are minimal and reasonable. Based on her average net income and her reasonable living expenses, Ms. Williams cannot maintain a “minimal” standard of living for herself if required to pay the Trust Entities loans. She has proven the first prong of the Brunner test.
It is almost certain that Ms. Williams’ financial situation will not improve over the next 20 years. Ms. Williams’ progressive health problems are likely to diminish her ability to work and thus lead to a reduction in earned income. There are therefore additional circumstances indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans. Ms. Williams has proven the second prong of the Brunner test.
With respect to the third prong of the Brunner test, good faith is measured by the debtor’s efforts to obtain employment, maximize income, and minimize expenses. In re Mason, 464 F.3d 878, 884 (9th Cir. 2006). Courts will also consider a debtor’s effort—or lack thereof—to negotiate a repayment plan, although a history of making or not making payments is, by itself, not dispositive. Id. Courts also examine the following factors: (1) whether the debtor has made any payments on the loan prior to filing for discharge, although a history of making or not making payments is, by itself, not dispositive; (2) whether the debtor has sought deferments or forbearances; (3) the timing of the debtor’s attempt to have the loan discharged; and (4) whether the debtor’s financial condition resulted from factors beyond her reasonable control, as a debtor may not willfully or negligently cause her own default. Roth, 490 B.R. at 917 (citations omitted).
At first blush, it would appear that several of these factors weigh against Ms. Williams on the issue of good faith. There is no evidence that she attempted to negotiate a repayment plan or that she sought a deferment or forbearance. She also never made any voluntary payments on the loans in the years before she filed bankruptcy. Nonetheless, the totality of the circumstances leads to the conclusion that Ms. Williams made a good faith effort to deal with her student loans.

The Court concludes that excepting her private student loans from discharge would impose an undue hardship on Ms. Williams within the meaning of 11 U.S.C. § 523(a)(8).

CONCLUSION

For the reasons set forth above, the Court concludes that the student loans owed by Plaintiff Jocelyn Williams to National Collegiate Student Loan Trust 2004-1, National Collegiate Student Loan Trust 2006-1, National Collegiate Student Loan Trust 2007-2, and National Collegiate Student Loan Trust 2005-1 that are identified in the Complaint would impose an undue hardship on Ms. Williams within the meaning of 11 U.S.C. § 523(a)(8), and accordingly, should be discharged in their entirety. The Court will enter a separate judgment, pursuant to Federal Rule of Bankruptcy Procedure 7058 and Federal Rule of Civil Procedure 58, consistent with this Memorandum Decision.

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About the blogger:

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also access my website at http://www.mtvernonbankruptcylawyer.com

False Statements and dischargeability (1)

Posted by michael64curry

Sometimes Debtors get themselves in trouble by saying things they should not … are they stuck with the debt after bankruptcy?

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Debtor made false non-written (oral) statements to his lawyers, Lamar, Archer & Cofrin, LLP, that he expected a large tax refund that he would use to pay his debt to the firm. Debtor filed for bankruptcy after Lamar obtained a judgment for the debt. Lamar then initiated an adversary proceeding to have the debt ruled nondischargeable. The bankruptcy court and the district court determined that the debt could not be discharged under 11 U.S.C. 523(a)(2)(A) because it was incurred by fraud. The court reversed and remanded, concluding that debtor’s debt to Lamar can be discharged in bankruptcy. In this case, because a statement about a single asset can be a “statement respecting the debtor’s . . . financial condition,” and because debtor’s statements were not in writing, his debt can be discharged under section 523(a)(2)(B).

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Read the majority of the opinion here.

Read the concurrence here.

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About the blogger:

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, McLeansboro, Centralia or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also find his website at http://www.mtvernonbankruptcylawyer.com.

Discharging Student Loans: Ripe time, Ripe place …

Posted by michael64curry

Here is another in a long line of Student Loan dischargeability cases …

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Student Loans Discharge Action Dismissed because the issue is not ripe!

In Re: David Wayne Sheppard and Tena Marie Sheppard, Debtors; vs. the U.S. Department of Education; West Virginia Junior College, Defendants.

Case # 16-20208; Adversary # 16-2049; Southern District of West Virginia

February 21, 2017

Memorandum Opinion and Order

Pending is the motion to dismiss by the Defendant, the United States Department of Education, filed December 5, 2016. The Plaintiff, Tena Marie Sheppard, responded in opposition to the motion to dismiss on December 12, 2016, and the United States Department of Education (“the Department”) replied on January 18, 2017. The motion to dismiss is ready for adjudication.

Although the Department has filed its motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, the grounds for dismissal better align with Rule 12(b)(1).

Mrs. Sheppard and her husband have been deemed permanently disabled by the Social Security Administration. On April 22, 2016, Mrs. Sheppard, along with her husband, filed a joint Chapter 13 petition. The Sheppards have proposed a Chapter 13 plan that provides for a monthly payment of $854.69 for 66 months. However, their disposable income amounts to only $444.68. At this time, the proposed Chapter 13 plan remains unconfirmed. A confirmation hearing is scheduled for March 1, 2017.

Mrs. Sheppard filed this adversary proceeding to discharge her student loans on August 17, 2016. In the complaint, Mrs. Sheppard alleges that the Department and West Virginia Junior College are non-priority unsecured creditors in the associated bankruptcy case. Further, she alleges that the repayment of her student loans imposes an undue hardship because she is disabled and unable to work. Mrs. Sheppard seeks a declaratory judgment as to the dischargeability of the debt pursuant to 11 U.S.C. § 523(a)(8), arguing both that the subject loans do not qualify as educational loans and, in the alternative, that the loans cause undue hardship. On October 7, 2016, the Department filed a Proof of Claim asserting Mrs. Sheppard owed $15,310.73 for unpaid student loans. On December 5, 2016, the Department moved to dismiss the adversary proceeding, stating that the matter was not prudentially ripe. Mrs. Sheppard answered and the Department replied. As of this date, West Virginia Junior College has neither answered nor otherwise moved.

II.

Governing Standard

As noted, the Department moves to dismiss pursuant to Rule 12(b)(6).Inasmuch as it argues lack of ripeness, however, the Department challenges the Court’s subject-matter jurisdiction. Accordingly, the Court analyzes the matter pursuant to Rule 12(b)(1), as made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7012(b).

Rule 12(b)(1) provides for a dismissal if the court lacks subject-matter jurisdiction. The Court has statutory subject-matter jurisdiction under 28 U.S.C. § 1334(b). A bankruptcy court “may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11.” 28 U.S.C. § 157(b)(1). The Court “may hear and determine” cases and core proceedings “arising under” the Bankruptcy Code or “arising in” a case under the Code. § 157(b)(1). The determination of the dischargeability of a debt is specifically listed as a core proceeding under 28 U.S.C. § 157(b)(2)(I).

A defendant may challenge subject-matter jurisdiction facially or factually. Kerns v. U.S., 585 F.3d 187, 192 (4th Cir. 2009). A facial challenge asserts the allegations in the complaint are insufficient to establish subject-matter jurisdiction. Lovern v. Edwards, 190 F.3d 648, 654 (4th Cir. 1999). This type of challenge involves the same procedural protections customarily available to a plaintiff under Rule 12(b)(6). Kerns, 585 F.3d at 192. In sum, “the facts alleged in the complaint are taken as true, and the motion must be denied if the complaint alleges sufficient facts to invoke subject matter jurisdiction.” Id.

When a defendant asserts “that the jurisdictional allegations of the complaint [are] not true,” he is asserting a factual challenge. Id. (internal quotation marks omitted)(quoting Adams v. Bain, 697 F.2d 1213, 1219 (4th Cir. 1982). When a challenge is factual, “the court may look beyond the pleadings and the jurisdictional allegations of the complaint and view whatever evidence has been submitted on the issue to determine whether in fact subject matter jurisdiction exists.” Stahlman v. U.S., 995 F. Supp. 2d 446, 451 (D. Md. 2014). The presumption of truthfulness available under Rule 12(b)(6) does not apply. Kerns, 585 F.3d at 192.

Here, the Department asserts that the complaint fails to allege sufficient facts to support the exercise of subject matter jurisdiction. That is a facial challenge. The Court will thus treat as true the facts alleged in the complaint, along with affording Mrs. Sheppard the reasonable inferences flowing therefrom.

Law and Analysis

The Department asserts that Mrs. Sheppard’s undue hardship challenge lacks prudential ripeness. It contends the dischargeability of a student loan does not ripen until at or near the time a Chapter 13 discharge is granted. Although a bankruptcy court is given statutory and adjudicatory subject-matter jurisdiction under 28 U.S.C. § 1334(b) and 28 U.S.C. § 157, ripeness involves constitutional and prudential subject-matter jurisdiction. U.S. Const. art. III, § 2, cl. 1. “Ripeness has two components: constitutional ripeness and prudential ripeness.” Educ. Credit Mgmt. Corp. v. Coleman, 560 F.3d 1000, 1004 (9th Cir. 2009).

Constitutional Ripeness

For constitutional ripeness to exist, the matter presented must amount to a “case or controversy.” Babbitt v. UFW Nat’l Union, 442 U.S. 289, 298 (1979). This requires asking whether the “conflicting contentions of the parties . . . present real, substantial controversy between parties having adverse legal interests, a dispute definite and concrete, not hypothetical or abstract.” Id. (internal quotation marks omitted) (quoting Railway Mail Ass’n v. Corsi, 326 U.S. 88 (1945)). Precedent indicates the constitutional ripeness of a student loan discharge action arises when the debtor files for bankruptcy. Cassim v. Educ. Credit Mgmt. Corp., 597 F.3d 432440 (6th Cir. 2010); Coleman, 560 F.3d at 1005. Our court of appeals has not spoken directly to the point, indicating instead that it would “decline- to adopt a hard and fast rule which would preclude bankruptcy courts from ever entertaining a proceeding to discharge student loan obligations until at or near the time the debtor has completed payments under a confirmed Chapter 13 plan.” Ekenasi v. Educ. Res. Inst., 325 F.3d 541, 547 (4th Cir. 2003).

Inasmuch as Mrs. Sheppard has sought relief under Chapter 13, her dischargeability suit is constitutionally ripe.

Prudential Ripeness

As noted, a matter that is constitutionally ripe must also be prudentially ripe. The Supreme Court has held that “[p]roblems of prematurity and abstractness may well present ‘insuperable obstacles’ to the exercise of the Court’s jurisdiction, even though that jurisdiction is technically present.” Socialist Labor Party v. Gilligan, 406 U.S. 583, 588 (1972) (quoting Rescue Army v. Mun. Ct. of L.A., 331 U.S. 549 (1947)). On the precise question respecting prudential ripeness of a student loan dischargeability action, the United States Court of Appeals for the Eighth Circuit concluded prudential ripeness is absent until “relatively close” to the actual date that a Chapter 13 discharge is granted. Bender v. Educ. Credit Mgmt. Corp., 368 F.3d 846, 848 (8th Cir. 2004).

Our court of appeals appears to tip toward this position. It has concluded that the matter would have to qualify as an “exceptional circumstance” to be considered ripe prior to discharge: it will be most difficult for a debtor, who has advanced his education at the expense of government-guaranteed loans, to prove with the requisite certainty that the repayment of his student loan obligations will be an “undue burden” on him during a significant portion of the repayment period of the student loans when the debtor chooses to make that claim far in advance of the expected completion date of his plan. Ekenasi, 325 F.3d at 547.

In Ekenasi, the debtor claimed undue hardship when attempting to discharge his student loan obligations. Id. at 544. At the time that the adversary proceeding was filed, the debtor’s Chapter 13 plan had been confirmed for three months. Id. The bankruptcy court granted the debtor a complete discharge of his student loan obligations because the debtor was unlikely to increase his income or his disposable income after the plan’s conclusion. Id. On appeal, the district court affirmed. Id. The court of appeals disagreed, concluding that a dischargeability determination so early in the case required too much speculation. Id. at 548. Although the plan had been confirmed, completion was two years away. Id. Our court of appeals noted that when the plan was scheduled to conclude, three of the debtor’s six children would no longer be dependents. Id. at 549. Further, the debtor’s obligations to general unsecured creditors would be discharged in their entirety. Id. These changes would have potentially increased the debtor’s disposable income during the life of the plan, which would have relieved any undue hardship. Id.

Here, Mrs. Sheppard asserts that the repayment of her student loans creates an undue hardship because both she and her husband are deemed permanently disabled by the Social Security Administration. Because of their disabilities, the Sheppards contend that their circumstances will not change in the future (Id.). Although their incomes appear to be fixed, discharging Mrs. Sheppard’s student loans would still require a great deal of speculation on the Court’s part. Unlike the Chapter 13 plan in Ekenasi, Mrs. Sheppard’s Chapter 13 plan has not been confirmed. Further, her proposed plan is unfeasible because her plan payments greatly outweigh her disposable income. Allowing this adversary proceeding to continue would require the Court to speculate not only regarding the confirmability of the proposed plan, but also that the Sheppards will obtain a Chapter 13 discharge at the plan’s conclusion, which is at least five years away. Assuming a modified plan produced a feasible path forward, at least one bankruptcy court has astutely observed as follows:

Roughly 60% of Chapter 13 cases in this district do not result in a discharge, usually because of the debtor’s inability to make the required plan payments for the requisite three or five years. Given the strong possibility that a Chapter 13 case will be dismissed long before discharge can occur, a determination of undue hardship early in the case would likely be rendered unnecessary and irrelevant. In re Brantley, No. 15-81516-WRS, 2016 WL 3003429, at *3 (Bankr. M.D. Ala. May 17, 2016)

In view of this necessary speculation, the Court concludes that Mrs. Sheppard’s adversary proceeding is premature and outside the boundaries of prudential ripeness.1 Additionally, the Court concludes that dismissal does not work a sustainable hardship on the parties. See In re Brantley, at *4 (While Brantley would understandably want to know whether the Chapter 13 payments she is making will obtain a discharge of her student loans, the Defendants have an equally compelling interest in avoiding potentially unnecessary litigation. Also, the Court is disinclined to keep the proceeding open in perpetual stasis, draining the Court’s resources, for five years while Brantley completes her plan payments.”).

III.

Based upon the foregoing discussion, it is, accordingly, ORDERED that the United States Department of Education’s Motion to Dismiss be, and is hereby, GRANTED.

***

The Court isn’t kicking the ball down the road – it makes a very logical and reasonable statement: why look into the dischargeability of a debt until we are more confident these Debtors will even receive a discharge? Who knows what will happen in the intervening years? As of April 2018, the Debtors are still paying into their Chapter 13 Plan … two-plus years to go!

But I worry about this issue – I have seen many objections to dischargeability of student loans fall apart in a Chapter 13. “If the Debtor can afford five years of monthly plan payments why can’t they afford monthly student loan payments afterwards?”

Heads, they win; Tails, you lose…

***

About the blogger:

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Centralia, McLeansboro or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also access my website at http://www.mtvernonbankruptcylawyer.com

A Scorched-Earth Policy as to Student Loans?

Posted by michael64curry

This case “fits the pattern of the Department of Education fighting a scorched earth battle over student loans … (t)he costs to the federal government in opposing this discharge likely equal or exceed the amount that it might eventually collect … “

A good example of the strange and frustrating attempts to discharge student loans.

I am reprinting this wonderful article by Diane Davis from https://www.bna.com/decision-reversed-mom-n73014475007/

Decision Reversed, Mom Can’t Wipe Out Student Loans in Bankruptcy

By Diane Davis

A mother separated from her husband with three small children failed to show that having to repay more than $25,000 in student loan debt would cause undue financial hardship and so can’t wipe out the debt in bankruptcy, the U.S. District Court for the Eastern District of Pennsylvania held.

Kristin Price didn’t demonstrate “that it is more likely than not that she will be unable to maintain a minimal standard of living for a significant portion of her loan term,” Judge Edward G. Smith wrote Jan. 24, reversing the bankruptcy court’s ruling in favor of Price in her Chapter 7 case.

Even though Smith agreed with the bankruptcy court that it was a “close case” and a “difficult decision,” he ultimately found the bankruptcy court’s analysis “flawed.”

The bankruptcy court’s ruling was considered a “win” by consumer advocates, gaining new ground for young, healthy, and working debtors who are trying to repay their debts but still need a bankruptcy discharge due to undue hardship. The district court’s reversal, however, is in line with the U.S. Department of Education’s tough stance on debtors, encouraging them not to even try to get their student loan debts discharged.

Student loan debt is dischargeable in bankruptcy under Bankruptcy Code Section 523(a)(8) but only if a debtor can show that repayment of the debt would impose an “undue hardship” on her and her dependents.

The bankruptcy court applied the so-called Brunner test for determining undue hardship. It requires that the debtor prove she can’t maintain a minimum standard of living for herself and her dependents, that this state of affairs is likely to persist for a significant portion of the repayment period, and that she made a good faith effort to repay the loans.

Because courts view Section 523(a)(8) as a narrow exception, they place a high burden of proof on a debtor seeking discharge. The determination of undue hardship is based on law and fact and is made on a case-by-case basis.

Appeal Ruling

Two bankruptcy attorneys familiar with student loan cases found the district court’s analysis “flawed” and so did the debtor’s counsel, who said they plan to appeal to the U.S. Court of Appeals for the Third Circuit.

“We are disappointed, but not surprised,” Price’s attorney Scott F. Waterman, Waterman & Mayer, LLP, in Media, Pa., told Bloomberg Law via email Jan. 29.

“The district court reversed the decision on a narrow factual basis,” Waterman said. “We believe it misinterpreted the bankruptcy court’s discussion on the burden of proof, confusing it with the proper burden of persuasion that exists when one party provides unrebutted evidence supporting its position,” he said.

The district court “failed to provide proper deference to the bankruptcy court’s findings of fact—findings of fact can only be reversed based upon abuse of discretion,” Waterman said.

“The issue of what is the proper standard of review of findings of fact and the application of those facts is actually pending before the U.S. Supreme Court in U.S. Bank National Association v. The Village at Lakeridge , Waterman said.

Price, a licensed vascular sonographer, is only working part-time because she says the market is “saturated” with sonographers and she can’t get more work.

She also falls under the “childcare squeeze” because two of her children have several years before they will attend school full time. As a result, if Price were to work full time, her additional employment would be offset by additional childcare expenses.

The district court focused on whether Price could find additional employment in her field in the future. The bankruptcy court based its decision on an analysis of the next five years, but the record lacked any evidence of Price’s chances of finding full-time employment with a different employer in the future, the court said.

Further, the bankruptcy court made an assumption about the level of saturation in the market and the likelihood it would persist without any additional information, the court said.

Considering all of the facts as a whole, the district court said it couldn’t conclude it was “more likely than not that Price will be unable to maintain a minimal standard of living for the next five years.”

Deference to Bankruptcy Court

The district court failed to give the proper weight to factual findings of the judge conducting the hearing, according to bankruptcy attorneys.

“Deference should be given to the trial judge” who is in a better position after hearing testimony to make these decisions, John Rao, an attorney with the National Consumer Law Center in Boston who specializes in bankruptcy and mortgage servicing, told Bloomberg Law Jan. 29.

These cases are challenging to win, he said.

“We were thrilled with the initial decision,” Rao said, because it gained new ground applying the undue hardship standard to a debtor who is working and isn’t handicapped.

Rao said he found similarities in this case and a 2013 case in the Seventh Circuit, Krieger v. Educ. Credit Mgmt. Corp . In Krieger, the judge had to apply a “multi-factor standard interpreting an open-ended statute,” he said. The more “vague the standard, the harder it is to find error in its application,” the Krieger court said.

Edward C. Boltz, a consumer advocate and partner with the Law Offices of John T. Orcutt, P.C., Durham, N.C., told Bloomberg Law Jan. 29, the district court gave “little weight to the judge that conducted the hearing.”

Similar to Acosta-Conniff v. Educ. Credit Mgmt. Corp. , the “district court mouths the standard that it ‘reviews the bankruptcy court’s factual findings for clear error’ but then really appears to review all of the bankruptcy court’s factual findings de novo,” Boltz said.

He “hopes the Third Circuit follows the Eleventh Circuit in Acosta-Conniff and reminds district courts to defer to the bankruptcy court on factual issues,” Boltz said.

Looking at Bigger Picture

Looking at the “bigger picture,” consumer bankruptcy attorneys view the district court’s reversal in other ways.

This case “fits the pattern of the Department of Education fighting a scorched earth battle over student loans,” according to Boltz, who is the former president of the National Association of Consumer Bankruptcy Attorneys.

“The costs to the federal government in opposing this discharge likely equal or exceed the amount that it might eventually collect from Ms.Price,” Boltz pointed out. “That leads to the conclusion that it isn’t these loans that matter, but squashing the idea that any debtor should try [to discharge them],” he said.

Even if the Third Circuit rules in Price’s favor and vacates the district court’s decision, it will most likely remand the case back to the bankruptcy court so the court can hear more evidence about the “saturation” in the marketplace, Rao said.

The Education Department wouldn’t comment on the case.

Scott F. Waterman, Media, Pa., and Matthew Hamermesh, Hangley Aronchick Segal & Pudlin, Philadelphia, represented Price; Anthony St. Joseph Philadelphia, represented DOE and U.S.; Trustee Gary F. Seitz, Philadelphia, represented himself.

The case is DeVos v. Price, E.D. Pa., 17-3064, 1/24/18 .

To contact the reporter on this story: Diane Davis in Washington at ddavis@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com

***

About the blogger:

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Centralia, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

You can also access my website at http://www.mtvernonbankruptcylawyer.com

Discharging Student Loans: “You basically carry it with you to your grave”

Posted by michael64curry

Enjoy (if that is the proper word) this article from the Dallas Morning News. You can also read it here: https://www.dallasnews.com/news/courts/2018/02/02/no-home-car-job-after-bankruptcy-still-owes-student-loans

It is by Kevin Krause, Federal Courts Reporter

She has no home, car or job after bankruptcy, but still owes for student loans

Vera Thomas scraped together enough money with the help of about $7,000 in student loans to attend community college for two semesters to try to better her job prospects.

That was in 2012. Two years later, unemployed and steeped in debt because of a worsening health condition called diabetic neuropathy, she quit paying on her loans. She has muscle weakness, pain and numbness.

Thomas, 62, filed for bankruptcy last year. Her credit card balance, medical bills, car loan and other expenses were wiped away. But the one debt that’s hounded her the most — her student loans — is still there.

Bankruptcy for Thomas and others like her is not the fresh start for which it was designed.

“I’m walking on eggshells every day,” she said. “I have applied for so many jobs. I think they look at my age, and I haven’t had any luck.”

Thomas has few belongings. Everything she owns can fit inside a mid-size sedan. She’s on food stamps, and her two-year job hunt hasn’t gone well. Her case illustrates how difficult it is for borrowers to discharge student loan debt in bankruptcy even when they are poor, unhealthy and facing a bleak financial future. Consumer advocates say that’s due to outdated laws Congress created years ago as well as judges who have strictly and narrowly interpreted the law.

“She’s the type of consumer that bankruptcy should provide some relief for,” said John Rao, staff attorney with the National Consumer Law Center in Boston.

Judge Harlin Hale, the Dallas bankruptcy judge in Thomas’ case, said he felt a “great deal of sympathy” for Thomas in his December 2017 order but said that his hands are tied due to legal precedent. The “demanding standard” adopted by federal courts in the 5th Circuit that includes Dallas says borrowers must show “total incapacity” to pay their student loan now or in the future in order to erase the debt, the judge said.

Consumer lawyers like Rao say that interpretation is contrary to the plain language of the law that requires a showing merely of “undue hardship.” But the bankruptcy law does not define that term, leaving it up to judges to interpret it. Some recent legal challenges in other states, including Massachusetts, have successfully freed borrowers from student loan debt. But Texas seems to offer little chance of such a result.

Hale said that in his 15 years on the federal bench, he has never discharged a student loan over the objection of a lender. He wrote that because people are increasingly being forced into bankruptcy due to student loan debt, more legal guidance from higher courts is needed to help judges like him deal with the growing problem.

Thomas’ attorney, Noah Schottenstein of Dallas, says he will appeal Hale’s decision. Schottenstein said judges took a legal standard established by the law and “ratcheted” it up.

“It imposed a burden on people who are least able to afford it,” he said. “There are a lot of people who need relief and have been unfairly barred from getting it.”

Liz Hill, press secretary at the U.S. Department of Education, issued a statement in response to a request for comment.

“We are looking closely at the best ways to provide help to students in these often difficult circumstances,” she said. “We work with the Justice Department to ensure that each matter is handled based on its individual facts and circumstances under the law.”

Student loan debt in the U.S. has reached $1.4 trillion and grows every year. In Texas, the number is about $90 billion. Recent data shows that about 4.6 million U.S. borrowers are in default on their student loans.

Thomas still has no income and needs to find a new place to live soon. But the interest on her student loans continues to accrue. She needs $7,806 to pay off her loans.

Thomas, who’s never been married, has a high school diploma and experience working in call centers. None of her jobs paid more than $25,000 a year.

Now she says she has no choice but to continue looking for a job to try to pay off the loans.

“I know I’m getting older, but I want to do as much as I can for as long as I can,” she said.

Thomas moved years ago to Virginia to help her sister and found a job at a call center where she worked for almost 12 years. In 2012, she enrolled in Thomas Nelson Community College in Hampton, Va., where she took night courses, hoping to earn a criminal justice degree and possibly work someday as a probation officer.

Thomas took out two loans, each for $3,500, in 2012.

But her classes required computer knowledge that she didn’t have. She failed a course because her computer broke down and she wasn’t able to submit homework. The pressures of balancing work and college became too much. Her second semester was her last.

Thomas said she made a couple of student loan payments, which came to about $77 per month, but then started having car problems. She scraped by. “It got to the point where I hardly had any food to eat,” she said.

She was fired in 2016 after a dispute with her manager. She made $16,800 that year.

It was then that she moved to Glenn Heights to be with her boyfriend.

After a few brief stints, including a job at Whataburger, Thomas filed for Chapter 7 bankruptcy. She listed $3,000 in assets in her 2017 filing and more than $30,800 in liabilities. Her possessions amounted to a 2007 Chevy Impala worth $3,000, a 42-inch television, shoes, clothes, 60 cents in a bank account and some Avon costume jewelry.

Thomas’ ex-boyfriend, whom she’s known since the third grade, is currently supporting her. She lost her car but borrows his for job interviews. But their relationship recently ended, and she needs to find somewhere else to stay. Ricci Epperson, the ex, said, “It’s been rough.”

Thomas has been denied unemployment compensation and Social Security disability. Her neuropathy, a type of permanent nerve damage, causes painful tingling in her hands, feet and arm. She can’t stand for long. Even wearing slippers for too long is painful. She describes it as a feeling like “someone’s stabbing you.”

She also said she has cataracts in one eye that cause blurry vision. She doesn’t qualify for Medicare but has received care under a charitable program at Parkland Memorial Hospital.

Most people in similar circumstances can’t afford to sue. Schottenstein took Thomas’ case for free after she applied for legal aid. He said in his court filing that due to Thomas’ age, her failing health and her lack of education, she has “no reasonable job prospects.”

He went after the commonly accepted interpretation of the law.

“If Congress intended to provide relief from educational debt only to persons who were indubitably incapable of earning a living, Congress would have said as much,” Schottenstein said in the filing.

Donna K. Webb, an assistant U.S. attorney in Dallas who represents the Department of Education, opposed the action and cited the three-pronged “Brunner test,” which emerged from a 1987 student loan discharge case and has become the most common standard used by courts.

It requires a showing of extraordinary circumstances such as serious disability or extreme poverty, which consumer advocates like Rao and even some bankruptcy judges say is outdated and overly harsh.

Under Brunner, borrowers must show that: They cannot maintain a minimal standard of living if forced to repay the loan; that circumstances indicate their situation is likely to “exist for a significant period;” and that they have made “good faith” attempts to repay the loans.

Webb said Thomas failed all three prongs.

“Tight finances are not sufficient,” she said in her filing, adding that Thomas has the ability to maintain a sedentary job. “Thomas has failed to establish her financial situation will not improve in the future.”

Webb also said the Social Security Administration denied Thomas’ application for disability, finding that she was “not disabled from all gainful employment.”

In his Dec. 20 ruling, Hale said Thomas met the first but not the second prong of the Brunner test. Under that standard, “dire financial conditions” are not enough, he said.

“Ms. Thomas conceded that she is unable to show she is completely incapable of any employment now or in the future,” Hale wrote.

The second prong — proving a hopeless future — is the most difficult and one critics say has put courts in the position of attempting to act as soothsayer. You have to show it’s likely you’ll never be able to repay your student loans, or as Dallas bankruptcy courts have ruled, you must show “total incapacity.”

Rao has argued in other cases that undue hardship should be based on facts, not conjecture and “unsubstantiated optimism” about a person’s future prospects.

“Life has many twists and turns that are unforeseen, making it impossible to forecast with precision a debtor’s condition in 10 or 20 years [as some courts have required],” he said in a 2015 filing in a separate case.

Schottenstein said people who need relief the most have the “hardest [legal] test in federal law to meet, or one of them,” referring to the Brunner test.

“Who can prove what will happen in the future? It’s unjust and unfair,” he said.

Hale, the judge, conceded that the standard has created an “incredibly high burden” but said he was bound by 5th Circuit precedent. He wrote in his order that “guidance on the standard to apply” would greatly help him and other bankruptcy judges with such cases in the future.

Dallas bankruptcy courts’ interpretation of undue hardship to mean total incapacity is not applied to other forms of consumer debt in bankruptcy like credit cards.

Courts in other circuits have used a less stringent standard called “totality of the circumstances,” which takes into account a variety of factors.

Clarity on the matter would take a new law from Congress or a ruling from the U.S. Supreme Court, neither of which is likely anytime soon, legal experts say. But if Thomas’ appeal is successful, it could at least give Texas student loan borrowers more relief in bankruptcy courts.

The Department of Education, which typically opposes student loan discharges, argues that the financial integrity of the student loan program is at stake. Their concern, according to Rao, is that “it’ll open up the floodgates.”

The department points out in these lawsuits that struggling borrowers can enroll in income-based repayment plans, which allow for lower monthly payments stretched out to as many as 25 years.

But critics like Rao say that can create an even bigger financial burden for those unable to pay over a long period because of mounting interest. They say some loans will never be paid off as a result, and that the payment plan defeats the purpose of bankruptcy, which is to offer people a fresh start.

Rao called such government efforts “deferring the inevitable.”

Although lawsuits like Thomas’ are increasingly winding up in bankruptcy court, few are successful, legal experts say. It requires a separate lawsuit in bankruptcy court, which can drag on for years and which few people in financial trouble can afford.

Some people have won student loan discharges elsewhere.

One of them was Robert Murphy, who in 2016 won his effort to erase more than $246,000 in loans he borrowed to send his three children to college. In that closely watched Massachusetts case, a federal appeals court sided with Murphy after a four-year court battle he waged against the Department of Education.

Murphy, 65 at the time, had lost his job as president of a manufacturing company and wasn’t able to find work for 13 years. His lawyer took up his case pro bono and called it a David vs. Goliath struggle.

The case was settled on the urging of the appeals court, thus avoiding a binding opinion that could act as a legal precedent.

Rao, who filed a brief supporting Murphy, said the type of borrower who concerns him the most is the person who, like Thomas, has some college study but never earned a degree. They are not even able to use their education, he said, but the student loans remain a lifelong burden.

“You basically carry it with you to your grave,” he said.

Thomas said she thinks the legal system doesn’t treat everyone equally. If some people can get six-figure student loans wiped out, she said she also should be able to get some relief.

“I can’t predict what other people will do. A lot of people don’t care,” she said. “If you’re low on the totem pole, it’s sorry, you’re out of luck.”

Copyright to its respective holders.

***

About the blogger:

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

You can also access my website at http://www.mtvernonbankruptcylawyer.com

Curry Law Office

Serving Southern Illinois for over 20 years

non-dischargeability

Discharging Student Loans in bankruptcy: sometimes the good guys win!